Annual Report 2019 - purecircle.com€“-Annual-Report-2019.pdf · Audit Committee Report 52...

Annual Report 2019

PureCircle Limited

Annual Report 2019

INTRODUCTIONHighlights 01

At a Glance 02

Chairman’s Report 05

STRATEGIC REPORT Our Market 10

Our Business Model 12

Our Strategy 14

Key Performance Indicators 16

Chief Executive Officer’s Review 19

Financial Review 23

Principal Risks & Uncertainties 26

Corporate Social Responsibility 36

GOVERNANCE Chairman’s Governance Overview 39

Board of Directors 44

Board Activity 46

Nomination Committee Report 49

Audit Committee Report 52

Remuneration Committee Report 58

Directors’ Report 66

FINANCIAL STATEMENTS Independent Auditors’ Report 72

Consolidated Statement of Financial Position 81

Consolidated Statement of Comprehensive Income 82

Consolidated Statement of Changes in Equity 83

Consolidated Statement of Cash Flows 84

Notes to the Consolidated Financial Statements 86

Parent Company Statement of Financial Position 137

Parent Company Statement of Comprehensive Income 138

Parent Company Statement of Changes in Equity 139

Parent Company Statement of Cash Flows 140

Notes to the Parent Company Financial Statements 141

COMPANY INFORMATION 152

PURECIRCLE IS THE WORLD’S LEADING PRODUCER AND INNOVATOR OF GREAT-TASTING STEVIA LEAF INGREDIENTS FOR THE GLOBAL FOOD AND BEVERAGE INDUSTRY.

PureCircle is the only stevia company with the formulation expertise, and a vertically integrated supply chain to deliver the great-tasting, high-quality, non-GMO stevia ingredients. Our vertical integration allows us to scale responsibly to meet the demands of the global food and beverage industry, with whom we work alongside to deliver custom stevia solutions specific to their needs.

PureCircle Limited (the “Company”) is a company incorporated and registered in Bermuda under the Companies Act 1981. The Company’s ordinary shares are listed on the London Stock Exchange (LSE).

PureCircle Limited · Annual Report 2019

Highlights

$124.0min sales

191granted patentsas at 30 June 2019

1,092employees

($29.6m)adjusted EBITDA*

63 countriessales in

($79.7m)net loss

5 billion+consumers with access to PureCircle stevia products

>21,000food and beverage products containing stevia accessible around the world

GLOBAL MEGA TRENDS

FROM LEAF TO PRODUCT

THE EVOLUTION OF GREAT TASTE

08

18

38

OUR PORTFOLIO PureCircle’s portfolio of stevia leaf ingredients focuses on highlighting the best tasting stevia ingredients which work well with a wide range of products for food and beverage companies. The Company’s success in cultivating proprietary stevia leaf varieties, which contain significantly higher amounts of the most-sugar like sweeteners; and in scaling the Company’s supply of Reb M and D through these special stevia leaf varieties, and its patented process to produce Reb M from other stevia sweeteners in the plant, provides further access to the best tasting stevia ingredients for the food and beverage companies.

High-purity stevia sweeteners to naturally reduce calories.

SG95 Reb A Alpha® Reb D and M Reb AM

Flavor modifiers that offer synergies with stevia sweeteners and clean labelling options.

NSF Family

Category Solutions that maximise calorie reduction in specific applications.

Sigma-Tea™ Sigma-Beverage™ Sigma-Dairy™

* Adjusted EBITDA is an alternative performance measure which the Directors believe is helpful in understanding the performance of the business. Refer to Note 30 – Segmental Reporting (pages 129 to 130) for definitions of alternative performance measures.

01

STRATEGIC REPORTINTRODUCTION GOVERNANCE FINANCIAL STATEMENTS COMPANY INFORMATION

INVESTMENT CASE

OUR KEY PRIORITIES AND CHALLENGES

At a Glance

OUR MISSION is to encourage healthy diets around the world by being the preferred grower, supplier and innovator of high-purity, great-tasting stevia ingredients for the global food and beverage industry.

Our product – high purity stevia – is a force for good in the world.

Customer centricWe want to become and be the preferred supplier and partner for producers in the food and beverage industry.

Coping with volatilityWe need to ensure that our business has the flexibility, capacity and robustness to cope with global market volatility, in whatever form that takes.

CompetitionOur bio-technology heritage gave us first mover advantage in developing the new stevia industry. Our role now is to stay ahead of the competition so as to preserve our leadership position for as long as possible.

OUR COMMITMENT IS TO… Growth in our business in all regions of the world.

Penetration of stevia into all major food and beverage categories.

Expansion of our production capacity to support demand.

Diversificationof leaf supply outside of China.

Investmentin our people, our systems and our organisation.

OUR MARKET IS GROWING AND DYNAMIC, FUELLED BY CONSUMER DEMAND

We help some of the largest global brands in the food and beverage industry to achieve their goals of reducing sugar and calories without compromising the taste of their products.

What sets us apart is not just what we do, it’s how we do it – we are the only stevia producer that has an integrated supply chain.

Our intellectual property is protected through over 300 patents granted and patents pending.

MEXICO

PARAGUAY

BRAZIL

UNITED STATES

02


INTRODUCTION

We are continually innovating to ensure we always create and deliver the greatest-tasting, most consistent stevia in the world.

Our market is growing and dynamic, fuelled by consumer demands, increasing regulation and legislation such as sugar taxes.

We reduce risks to our business through geographic, products and sector diversification.

We have restructured and strengthened our Board and management teams towards better performance and controls, with proper governance.

OUR GEOGRAPHIC FOOTPRINT

UK

FRANCE

ZAMBIA

AUSTRALIA

INDIA

MALAYSIA

CHINA

KENYA

TURKEY

SWEDEN

Offices

Warehouses

Manufacturing plant

Farms (not owned)

Application laboratory

03


PureCircle’s industry-leading knowledge of how to get the best ingredients directly from the stevia leaf has been one of its key points of differentiation. The PureCircle Agronomy Programme has yielded consistently advantageous stevia plant varieties which yield the most sought after stevia leaf ingredients for food and beverage companies.

Everything PureCircle does begins and ends with the stevia leaf. Its production technologies have enabled the Company to ramp up its ability to produce significant quantities of next generation non-GMO stevia cost-effectively for food and beverage companies of all sizes.

Additionally, because of PureCircle’s ability to map the full genome of the stevia leaf, new functional ingredients have been identified. PureCircle is looking to commercialise new antioxidants, fibres and proteins from the stevia leaf which will provide both functional ingredients paired with its existing robust portfolio of stevia leaf sweeteners (like Reb M and Reb D) and flavours. This all makes PureCircle’s products more cost-effective and sustainable for its customers.

Getting to great taste has always been highly prioritised. In 2018, PureCircle brought in its own executive chef to help expand its application and formulation work, and move into additional culinary applications.

PureCircle is working with customers to achieve great taste with its naturally sourced ingredients in confectionery, baked goods, dairy, supplements and several other categories where sugar reduction has become a priority. With a sole focus on stevia, PureCircle has unparalleled expertise and proficiencies working with these non-GMO ingredients.

PURECIRCLE’S INDUSTRY LEADING FORMULATION EXPERTISE PureCircle is continuously investing in its ability to better serve customers and attract new ones. PureCircle next generation stevia offers distinct advantages over other stevia ingredients, and the Company’s ability to formulate with it across an increasingly wider range of applications has allowed PureCircle to unlock and overcome barriers related to taste.

04


INTRODUCTIONINTRODUCTION

Chairman’s Report

As a Board, we had to understand the root causes of the problems. We identified a culture within the organisation of “make the numbers” as a priority over doing things properly. Operating management have always been very committed to the business and clearly wished the business to be successful. At the same time, meeting our loan covenants to satisfy our lenders was an issue in management’s minds as well. As a result, proper accounting controls were overridden and inappropriate transactions were recorded.

During this period of finalising our FY2019 results, both the CEO and CFO left the business. Their departures were traumatic, especially as the CEO, the founder of the business, can be credited with creating the stevia industry.

We also undertook an investigation to understand whether these issues were the result of systems, processes, and controls that were not fit for purpose, or whether there were any other issues which required addressing. We are implementing those recommended actions which are briefly discussed below:

1. We are strengthening financial oversight and setting policies and procedures in the Group to ensure no reoccurrence of previous accounting and governance issues.

2. We have brought in Jimmy Lim, CFO to be based in Kuala Lumpur, Malaysia, where the centre of the Group’s financial operations is located.

3. We are implementing and enhancing our policies and standard operating procedures (SOPs) relating to critical financial functions such as consolidation, inventory management and sales recognition policy etc.

“ PURECIRCLE FACED MANY DIFFICULT CHALLENGES IN FINALISING OUR FY2019 RESULTS IN ORDER TO DELIVER THIS ANNUAL REPORT TO OUR SHAREHOLDERS. SOME OF THESE CHALLENGES HAVE BEEN REFERRED TO IN OUR PUBLIC DISCLOSURES BUT ON BEHALF OF THE BOARD, I WOULD LIKE TO TAKE THIS OPPORTUNITY TO PROVIDE OUR SHAREHOLDERS WITH A CLEAR ACCOUNT OF WHAT HAPPENED AND WHAT WE HAVE DONE TO ADDRESS THE ISSUES WE FACED.”

John Slosar, the former Chairman, assumed the role of Interim CEO in November 2019. He personally undertook to speak to those in the organisation who might have been involved or known about the issues described above and whose leadership in changing Company culture we deemed important going forwards to ensure that they understood that we were going to operate to high ethical standards. John provided stability, leadership and stewardship to the Company during a period of uncertainly and on behalf of the Board, I would like to express our sincere appreciation.

The Board has closely monitored these investigations and is satisfied that management has reviewed a sufficiently large number of transactions to support these financial statements. Our auditors undertook significant additional testing of transactions to verify the credibility of the results in FY2019 and for previous years. Their additional testing confirmed the control environment problems in the Company.

Your Board is committed to producing correct financial statements and is satisfied that we have identified and corrected these issues and that we have taken positive steps to ensure that there will be no recurrence of them going forwards.

Following the various audit adjustments reflected in our FY19 financial statements, it became clear that the Company had breached the banking covenants related to the bank facility. The Company therefore approached the banks in its lending syndicate and began discussions to secure appropriate waivers of past breaches and in order to put the Company in a stable position to refinance its debts, given that the current term of our debt agreement expires in November 2020.

I joined the Board as a Non-Executive Director on 18 November 2019 and was appointed as Chairman on 10 February 2020, after the AGM.

ACCOUNTING AND GOVERNANCE ISSUESAs we approached the scheduled date for publication of the accounts in September 2019, our auditors made us aware that there was an unexplained reconciliation difference in the value of our inventory between two internal systems which are used to account for and manage the business. The impact of this issue covered multiple years and resulted in not derecognising the full cost of inventory to cost-of-goods-sold (COGS) upon sale. We brought in external consultants, specifically forensic accountants and legal specialists to identify the corrections needed and a clear set of actions to prevent recurrence.

These discoveries led us to disclose that we believed there to have been inappropriate accounting treatment for allocation for full cost of inventory and COGS as disclosed in Notes 12 and Note 34 to the Comprehensive Financial Statements.

In addition, during the course of work being undertaken by PricewaterhouseCoopers, matters of concern were identified in relation to how certain other transactions had been constructed and/or reflected in the Group’s accounting records. These matters relate to revenue cut-off, and non-commercial transactions. The investigations identified the apparent override of controls by members of senior management that may have contributed to the historical misstatements of the Company’s results going undetected. As a result, adjustments with the effect of reducing sales of approximately US$4.5 million and US$5.1 million have been made to the 2018 and 2017 financial results respectively.

05


The Group secured an approval from its lenders for Waivers and Amendments to its Senior Facility Agreement (“Waivers and Amendments”). This fully waives all previous defaults, in addition to securing $8.6 million of additional liquidity into the business by way of an unsecured subordinated loan from certain substantial shareholders.

The Waivers and Amendments contain certain conditions and covenants that the Group may not be able to meet, and there is also the risk, in particular in relation to COVID-19 pandemic, that the Group may not have sufficient liquidity up until the facility is required to be repaid in November. However, the Directors are exploring alternative financing options including securing a definitive new equity infusion, full debt refinancing or sale and leaseback of the refinery plant facilities as alternatives to raise cash to fund the business and operations before the facility needs to be repaid.

This is an important step in ensuring the Company remains viable and has the liquidity it needs to deliver on its strategy for the foreseeable future. Nonetheless, these matters indicate the existence of a material uncertainty that casts doubt on the Group’s going concern assumptions. Our auditors have drawn attention to the material uncertainty with respect to going concern in an emphasis of matter in their audit opinion.

Further details are provided in Note 4 on pages 89 to 95, and Note 22 on pages 122 and 123, to the Consolidated Financial Statements, respectively.

I am pleased to say that the Company has had good support from our banks, and I would like to thank them for that.

MANAGEMENT AND BOARDThere has been wholesale change to the PureCircle Board over the past few months as we deal with the aftermath of the issues discussed above and focus on strengthening our Board for the future. The full details of these changes are provided in the Governance Overview report on page 40.

Peter Lai was appointed as Group Chief Executive Officer and Jimmy Lim as Chief Financial Officer and, both joined the Board in February 2020.

Peter already had significant knowledge of PureCircle, having been a Non-Executive Director from June 2008 until March 2017. When he stepped down from the Board, he continued to serve as Advisor to the Board on China matters and was Chairman of the Group’s two subsidiaries there.

Chairman’s Report continued

Peter brings to the role experience in financial management and corporate governance good practice. He has held various senior positions in banking institutions including Morgan Grenfell Asia & Partners Securities and Citi Private Bank. Peter is also a Chartered Financial Analyst (CFA) charterholder of the CFA Institute, USA since 1992.

Jimmy Lim took over the position of Group CFO in February 2020, following the completion of a handover from James Ritchie, the Interim CFO. Jimmy was elected to join the Board following the shareholders meeting held on 10 February 2020 and is based at the Company’s office in Kuala Lumpur, Malaysia. He has over 27 years’ financial and operational management experience. He has previously overseen key financial management operations and has driven business profitability. He brings a commercial perspective to his professional activities, having previously been a CEO. His ability to form clear judgements, and achieve results has been well-tested throughout his career. Jimmy is a Fellow Chartered Accountant of Singapore and a Fellow CPA of Australia.

I welcome them both to the Group and I am confident that they will provide the leadership which PureCircle needs to restore its reputation for financial soundness.

In November 2019, we welcomed Datuk Ali Kadir, Tan Boon Seng and Tan Sri Wan Azmi Wan Hamzah who joined in November 2019. Boon Seng subsequently resigned in December 2019 for personal reasons.

Following their resignation in December 2019, I thank John Gibney, Mitch Adamek and Tan Boon Seng for their service as Non-Executive Directors. Also, on behalf of the Board, I would also like to express our appreciation to John Slosar, Rosemarie S. Andolino and Ann Marie Scichili, who stood for re-election at the recent AGM in February 2020, however, withdrew their candidacy for re-election to the Board of the Company at its recent AGM in February 2020.

Finally, I would also like to thank Paul Selway-Swift, who retired after 11 years as Chairman following the Annual General Meeting in November 2018, for his great contribution to, and stewardship of, PureCircle.

STRATEGIC FOCUSDespite the issues that have justifiably consumed so much attention recently, I believe that our strategy to transform the business to scale, produce and sell breakthrough super-tasting natural stevia ingredients and commercialise new technologies remains sound.

We are continuing to develop and innovate stevia products, as demonstrated by some remarkable achievements for the Company realised in FY2019 and continuing to date.

First, the Company has proven that it is able to produce Reb M and bio Reb M in scale. These new sweeteners can now be found in an increasing number of food and beverage products and our sales pipeline is showing increasing market acceptance of Reb M and bio Reb M. Being such a step-change improvement over other stevia sweeteners, it is not surprising that we have had to defend the IP we created in Reb M. As a result of a lawsuit filed by us, a challenge was raised to our bio Reb M patents at the Patent Review Board in the Patent Office in Washington, D.C. After review, the Patent Review Board affirmed our patents, which for PureCircle was an important result.

The supply of stevia is vital for the success of our business. We have been working hard on developing better, more productive cultivars for many years. This work is now clearly paying off. In FY2020, about 25% of our leaf grown in China will be of a variety developed by us that has some 40% more steviol glycosides than previous stevia varieties. This hardy variety grows well and promises significant unit cost reductions for our products going forwards. In FY2021, we are planning so that nearly all of the leaf grown for PureCircle by its contracted farmers will be of this new, highly productive variety.

COVID-19 UPDATEThe World Health Organization (WHO) on 30 January 2020 declared the coronavirus outbreak a public health emergency. During that time, the Group’s extraction plant in China was already closed for the week long lunar new year celebration but operations were further suspended from 31 January 2020 to 18 February 2020 to adhere to the authority’s measure to contain the outbreak. Operations at the Group’s refinery facility in Malaysia have been suspended since 18 March 2020 following the government’s movement control order to stop COVID-19 infection, however we are pleased to report that we have secured approval from the authorities to reopen and restart production immediately.

Our priority is the health and safety of our employees. As of today, none of our employees are known to be infected or suspected to have contracted the virus. Given the economic uncertainty arising from COVID-19, the Group is taking measures to support the business to withstand this period of uncertainty.

Refer to CEO’s report in the section following for further details.

06


INTRODUCTION

CONCLUSIONDespite the financial and governance issues during FY2019, PureCircle has continued to refine its expertise in bringing the highest quality, cost effective stevia products to the food and beverage companies of the world. The PureCircle team excels at this. I would like the thank all our PureCircle colleagues for their hard work and our suppliers and customers for their support, particularly over the last six months.

The delay in publishing our accounts and the suspension of our shares is greatly regretted by the Board. We thank you, our shareholders, for your patience. We have learnt from this and will ensure that your business is run with the highest standards of governance and control in the future.

PureCircle has repeatedly demonstrated its ability to innovate. We have been investing in stevia, in our products and our people. Our markets are opening up as both governments and consumers look to move to lower calorie alternatives to sugar. With our new management team, we will work toward delivering PureCircle’s strategic priorities.

Dato’ Robert Cheim Dau MengNon-Executive Chairman 31 March 2020

07


PURECIRCLE EMBODIES GLOBAL MEGA TRENDS PureCircle’s business is intrinsically aligned with the most prominent global mega trends. Three of the most commonly identified macro trends include sugar reduction, plant based foods and sustainability. These are among the themes which drive our innovation.

PureCircle is directly aligned with the most dynamic and fast growing areas within the evolving food and beverage landscape. While sugar reduction is a fundamental element of our business, we are well equipped to deliver several value added services which our customers covet. This is providing substantial growth opportunities for the Company.

Consumers are increasingly making health and wellness a priority. Growing global concerns about obesity and diabetes, as well as government involvement and levies on sugar, are convincing global food and beverage companies to reduce sugar content in their products.

In a 2019 Food Dive analysis, 91%1 of U.S. consumers thought product options with recognisable ingredients were healthier. This is in part why demand for natural-origin, zero-calorie stevia leaf sweeteners and flavours has grown every year since it was introduced as an ingredient for commercial use.

PureCircle is dedicated to helping food and beverage companies quickly develop products which taste great, whilst reducing sugar content and overall calories. We have also begun partnering with JDRF2 to raise awareness of the benefits of stevia ingredients for the diabetic community.

According to Technomic’s 2018 Global Megatrends, around 75% of consumers strongly agree that restaurants should be more forthcoming about where they get ingredients, and 75% of consumers are drawn to foods that are natural, authentic and premium. PureCircle’s Agronomy Programme paired with its vertically integrated supply chain provides customers with the assurances needed to satisfy these consumer trends.

CONSUMERS ARE INCREASINGLY MAKING HEALTH AND WELLNESS A PRIORITY

1 According to a report by Innova Market Insights, a knowledge leader in the food and beverage industry

2 JDRF is a non-profit global organisation that funds type 1 diabetes research

08


STRATEGIC REPORT Our Market 10

Our Business Model 12

Our Strategy 14

Key Performance Indicators 16

Chief Executive Officer’s Review 19

Financial Review 23

Principal Risks & Uncertainties 26

Corporate Social Responsibility 36

09


We are in the midst of significant growth in the stevia ingredient market. Products with stevia ingredients are launching across more food and beverage categories than ever before. PureCircle’s next generation stevia leaf ingredients are well positioned to help companies seize the opportunity presented by these consumer trends.

Food and beverage companies are responding to increasing consumer demand for products with reduced sugar and caloric content using natural ingredients. There continues to be a strong push for more global sugar-reduction, and to address consumers’ growing health and wellness agenda. This strengthens the appeal of stevia leaf sweeteners. PureCircle is leading the industry in terms of its ability to supply stevia leaf ingredients cost effectively and at scale. This enables food and beverage companies to offer their products with zero added sugar and stevia as the primary sweetening ingredient.

Global launches of food and beverage products containing stevia continued to rise in 2019. According to Innova Market Insights 2020 data, in 2019 there were well over 6,000 launches of food and beverage products containing stevia sweeteners, up +10% versus prior year. To-date, there have been over 35,000 products launched with stevia. In a number of categories, where high intensity sweeteners are used, stevia is now the leader; these categories include plant-based drinks (dairy alternatives); dairy-based ice cream and frozen yoghurt; ready-to-drink iced tea; and dressings and vinegars. Stevia also has a high use incidence in: carbonated soft drinks; and meal replacements and other drinks.

Consistent with the growth of stevia use in product launches, the increase relative to other zero-calorie sweeteners has also been dramatic. According to the Mintel Global New Products Database in 2011, stevia was used in 10% of all food and beverage products launched with high intensity sweeteners, whereas aspartame was found in 36%. In 2018, stevia usage nearly tripled to 29% compared to aspartame which fell to just 20%. With stevia, food and beverage companies have access to a non-GMO, zero-calorie sweetener from a plant which delivers on taste.

The increased use of stevia sweeteners is a trend which is being observed globally. The top two regions where stevia use is accelerating year-over-year were Asia/Pacific (42%) and Europe (21%), followed by Latin America, North America and Middle East/Africa. This further exemplifies how far stevia adoption has progressed since it was first introduced as a commercial ingredient.

According to the Data Bridge Market Research - Industry Trends and Forecast to 2027: Global Sugar Substitute Report, usage of stevia ingredients is expected to increase by 64% for the next three years. The report also projects stevia will grow at a CAGR of 9.3% in the forecast period of 2020 to 2027.

The story of stevia is indeed evolving. Not long ago, it was viewed as a plant-based, zero-calorie, single-ingredient sweetener which worked well in some beverage and food applications. PureCircle has overcome the past challenges facing stevia leaf sweeteners: taste, supply and cost.

With exceptional taste, proprietary products, custom blending capability and deep formulations expertise, PureCircle’s next generation, non-GMO stevia leaf ingredients work well across multiple consumer product categories. In addition, PureCircle has ramped up its ability to supply the best-tasting ingredients, like Reb M, cost effectively and large quantities that food and beverage companies require.

Recently PureCircle announced a new proprietary varietal of stevia plants, which naturally yields greater quantities of our great-tasting next generation stevia ingredients. This breakthrough enhances the Company’s production efficiency, and further improves its ability to deliver a sustainable, cost effective supply of these next generation stevia leaf ingredients to food and beverage companies.

PureCircle is continuing to offer consumer educational support for its customers by targeting key opinion leaders at the regional level. The Company has partnered with the Illinois chapter of JDRF, which funds research, advocates for government action and provides support to fight type 1 diabetes. PureCircle has pledged to help support JDRF’s work, and help support the diabetic community through stevia education.

There are several activities and trends which are creating positive conditions for PureCircle’s business.

RAPID GROWTH IN THE USE OF STEVIA ACROSS MARKET CATEGORIES AND GEOGRAPHIES PRESENTS INCREASED OPPORTUNITY FOR PURECIRCLE NEXT GENERATION STEVIA LEAF INNOVATIONS AND FORMULATION EXPERTISE.

Number of adults1 with diabetes worldwide

Worldwide obesity has nearly

In 2016, more than

since 1975.

18 years and older, were overweight. Of these,

TRIPLED

700 MILLION

51%578 MILLION463 MILLION

1.9 BILLION ADULTS

OVER 650 MILLION WERE OBESE

Source International Diabetes Federation. IDF Diabetes Atlas, 9th edn. Brussels, Belgium: 2019. Available at: https://www.diabetesatlas.org

Source www.who.int/news-room/fact-sheets/detail/ obesity-and-overweight

2045

2030

2019

An estimated 463 million adults1 are currently living with diabetes, this represents 9.3% of the world’s population in this age group.

increase

10


STRATEGIC REPORT

Our Market

Today many major regulatory agencies have approved the use of stevia leaf sweeteners. The regulatory landscape continues to move in a favourable direction for stevia leaf ingredients with over 200 countries having approved the use of at least some stevia ingredients.

PureCircle remains focused on gaining global approvals for new ingredients found in the stevia leaf, including new sweeteners, flavours, antioxidants, proteins and fibres. PureCircle is working with regulatory bodies and key opinion leaders all over the world to bring access to the full leaf.

Moving into the next fiscal year, the stage is set for stevia leaf ingredients to become even more prevalent and impactful across food and beverage categories as well as regions. PureCircle’s efforts to maximise taste performance, affordably scale sweeteners and flavours through patented innovation processes and an evolving regulatory landscape have converged to provide huge opportunity for food and beverage companies to unlock stevia’s true potential.

The sweetness of three stevia leaves can replace

25% of the calories in a can of soda

11


INTR

ODUC

TION

WE CREATE VALUE FOR OUR STAKEHOLDERS BY PRODUCING THE BEST, NATURAL ORIGIN, ZERO-CALORIE SWEETENER MADE FROM STEVIA PLANTS.

SustainabilityRead more from pages 36 and 37

Risk managementRead more from pages 26 to 35

INPUTS UNIQUE RESOURCES• Global footprint of farms (not

owned), warehouses, manufacturing facilities and sales offices

• Financial resources

• Intellectual property and know-how 191 granted patents as at 30 June 2019 and 329 pending applications worldwide as at 30 June 2019

• Entrepreneurial culture engendered by our experienced management team and shared with our >1,000 employees

RESEARCH & DEVELOPMENT (R&D)Multidisciplinary approach spanning plant breeding, agronomy, biotechnology, biochemistry, food technology and sensory analysis

STRATEGIC RELATIONSHIPS• Third party farmers

• Other suppliers and partners

• Customers: global F&B, Flavour companies

• Investors

WHAT WE DOWe have successfully commercialised a portfolio of natural sweeteners, flavours and specialty ingredients based on high purity stevia.

UNDERPINNED BY

5

ApplicationProviding formulation expertise to deliver great-tasting products

4

PurificationPurifying steviol glycosides with an unmatched scale and consistency

6

Finished productsProviding our customers with a level of transparency that is superior to any other stevia manufacturer

Supply Chain

12


STRATEGIC REPORT

Our Business Model

GovernanceRead more from pages 39 to 69

CONSUMERSGreat tasting products with reduced calories, to support a healthy, sustainable lifestyle

CUSTOMERSInnovative, natural stevia ingredients with compelling benefits and consumer acceptance, supported with proprietary insights, customer training and technical support

FARMERS AND OTHER SUPPLY CHAIN PARTNERSSustainable income, training and materials

EMPLOYEESChallenging development opportunities and appealing career prospects

SOCIETYMaterial water, land and carbon footprint savings

OUTPUTS

2 HarvestingCultivating best sustainability practices and providing training and materials to ensure success with local third party farmers across four continents

1

Plant BreedingBreeding proprietary stevia varieties with higher sweet glycoside content

3

ExtractionProducing our own extract to ensure quality standards are met

7

Commercialisation• Scientific and Regulatory Affairs

• Sales & Marketing

Financial value reinvested back into inputs

13


STRATEGIC PRIORITIES DESCRIPTION PROGRESS IN 2019

INNOVATION

PARTNERING

VERTICALLY INTEGRATED SUPPLY CHAIN

SCALABLE CAPACITY

Innovation is at the core of PureCircle. From crop to concept to consumer, delivering best tasting products that drive stevia adoption and market expansion, bringing better functioning, more cost-effective solutions across more consumer categories.

We collaborate with our food and beverage customers to deliver the best-tasting stevia solutions formulated specifically for their products, help tell their ingredient and sustainability stories through PureCircle messaging and multimedia resources and provide valuable insights into their relevant markets.

Our vertically-integrated supply chain is a key differentiator and part of our mission as the industry leader in production of stevia leaf ingredients. We have leveraged our intellectual property portfolio to ensure full transparency, traceability and consistency of our stevia leaf ingredients.

We continue to invest in our capacity to scale stevia ingredients. This allows us to leverage structural growth in the sweetener and flavour markets through geographical diversification.

• Field-tested new Starleaf stevia varietal, which yields greater quantities of next generation stevia ingredients; we will increase this variety from 20% to 90% of our total crop in 2020.

• Initiated a consumer trial product ice cream to gather consumer perception data, and demonstrate consumer adoption of a great-tasting, stevia-forward product.

• Debuted a new proprietary stevia product, Sigma Syrup, which provides superior taste and overcomes solubility challenges encountered when using other stevia sweeteners.

• Developed PCS-3028, a new proprietary stevia leaf sweetener which increases stevia solubility by 10x.

• Continued development of our stevia antioxidant ingredient and exploratory work on stevia protein and fibre.

• Provided stevia ingredients to thousands of in market products.

• Opened new office and laboratory in Sao Paulo, Brazil to enhance support to Latin American customers.

• Continued to enhance capabilities of innovation lab in Chicago to increase breadth of category expertise.

• Leveraged in-house executive chef to expand stevia’s use and collaboration with food service customers.

• Realigned sales team to strengthen regional leadership and accountability, deepening market intimacy and accelerating penetration of regional key accounts.

• Strengthened flourishing farming partnerships in Zambia to enhance sourcing and reduce supply risk.

• Reduced the amount of supplemental stevia purchased from farmers who are not actively partnering with PureCircle.

• Improved facility efficiency to support continual growth in regional revenue.

• Maintained flexibility in arrangements with sourcing stevia extraction from third party contractors to meet evolving client needs.

• Increased the productivity of each stevia leaf to yield a higher percentage of usable ingredients for food and beverage industry.

WE WILL CONTINUE INVESTING IN OUR PRODUCTS AND PEOPLE TO EXPAND THE ADOPTION OF PURECIRCLE STEVIA ACROSS ADDITIONAL CATEGORIES AND GLOBAL MARKETS.

OUR STRATEGY TO ACHIEVE THIS IS SET OUT BELOW:

OUR OBJECTIVE IS TO BUILD A LARGE, LONG-TERM, NATURAL INGREDIENTS BUSINESS BASED ON STEVIA PROVIDING BEST-TASTING, SUSTAINABLE, AFFORDABLE, LOW-CALORIE SOLUTIONS TO THE WORLD’S FOOD, BEVERAGE AND SUPPLEMENT COMPANIES AND CONSUMERS.

14


STRATEGIC REPORT

Our Strategy

INNOVATION IN ACTIONPURECIRCLE DEBUTS HIGHER-YIELD STEVIA LEAF VARIETAL; DEVELOPS PCS 3028 – A NEW PROPRIETARY STEVIA SWEETENER WITH BREAKTHROUGH SOLUBILITY; LAUNCHES PROPRIETARY PERFORMANCE OPTIMISED BLEND SIGMA SYRUP; AND INTRODUCES BRANDED, ZERO SUGAR ICE CREAM WITH STEVIA TO DEMONSTRATE EXCELLENT TASTE, DRIVE CONSUMER DEMAND AND CUSTOMER ADOPTION IN 2019

PureCircle heavily focused efforts on the innovation of next generation stevia in 2019. Consistent with PureCircle’s historical approach, the Company looked to the leaf for inspiration, breeding a new, more productive stevia varietal and developing PCS 3028, a new, more soluble sweetener. PureCircle’s industry-leading formulation expertise led to a new, functionally optimised blend in the Company’s portfolio, Sigma Syrup, which combines taste performance and improved solubility properties, further unleashing the potential of stevia in challenging applications. The Company also innovated in its sales approach, market-validating consumer preference and demand for best-tasting stevia through its consumer trial of its branded PureCircle Ice Cream in the summer of 2019.

Building on its own innovations, PureCircle introduced a new stevia sweetener, PCS 3028 and a new product called Sigma Syrup. PCS 3028 offers breakthrough solubility 10 times greater than existing stevia sweeteners. Sigma Syrup is an optimised proprietary blend of next generation stevia leaf ingredients, including Reb M, which provides superior taste and overcomes solubility challenges encountered when using other stevia sweeteners in products which are high in sweetness intensity like liquid concentrates and tabletop syrups.

Carefully cultivated by PureCircle and successfully field-tested, a new proprietary stevia varietal is now yielding much greater quantities of the best tasting next generation stevia ingredients. This breakthrough dramatically improved the Company’s production efficiency, reduced the amount of processing of the leaf and further enhanced the Company’s ability to deliver a sustainable, scaled supply of next generation stevia ingredients to food and beverage companies. Furthermore, the increased plant productivity enables PureCircle to improve cost efficiency, achieving the Company’s goal of making great-tasting stevia affordable and accessible to a broad range of brands and consumers.

In 2019, 20% of the stevia plants grown by PureCircle’s partnering farmers were comprised of this new variety. Moving forward, the plan is to switch 90% of the total contracted stevia crop to this variety.

Riding on PureCircle’s innovation strength, it now holds over 500 patents granted and patents pending covering a wide range of stevia related products and processes. All of PureCircle’s products benefit from the extensive innovations embodied in these patent assets. These patent assets further establish and expand the foundation for PureCircle’s future innovative product offerings. The Company continues to invest in innovation, and is continuously looking to the stevia plant for new ingredient solutions.

In addition to advancing its agronomy, production and portfolio, PureCircle set out to transform its customer and consumer engagement approach. By moving beyond prototypes, PureCircle delivered inspiring and fully in-market tested product proposals to customers. Choosing ice cream, a fast-growth area for sugar reduction, PureCircle aims to demonstrate the transformative consumer experience offered by its unique, best-tasting sweeteners. In the summer of 2019, the Company launched a consumer trial of its branded, consumer-facing zero added sugar ice cream product, with rich, traditional taste and significantly less calories.

PureCircle fielded a multi-month, in-market consumer test which included trial, influencer activation and direct-to-consumer sales. The Company gathered deep insights and data on consumer response, preference and purchase. Demonstrating PureCircle’s exceptional sugar-like stevia sweeteners and formulation expertise, the ice cream showed strong performance from perception to purchase with over 80% of consumers reporting strong intent to purchase, if the product is made available for sale in the market. This compelling data, combined with similarly strong consumer feedback in six international markets, goes beyond prototypes to show true consumer adoption. This as a selling tool to showcase consumer perception and performance of next generation stevia leaf ingredients.

PureCircle will continue its innovation momentum in 2020 by exploring breakthrough applications of stevia that go beyond sweetener properties.

15


FINANCIAL KEY PERFORMANCE INDICATORS

Sales (US$m)

$124.0m (2018: $126.6m)

127.3

22.2

45.4

4.1 23.8

40.3 32

138.6

34.2

52.9

14.6 31.9

57.0 41

2019

2019

2019

2019 2019

2019 2019

2018

2018

2018

2018 2018

2018 2018

2016

2016

2016

2016 2016

2016 2016

2017

2017

2017

2017 2017

2017 2017

2015

2015

2015

2015 2015

2015 2015

113.9

19.8

84.7

1.2 16.0

40.1 35

126.6

14.7

98.1

(1.7) 13.5

38.3 30

124.0

(29.6)

68.6

(79.7) 7.6

1.2 1

Adjusted EBITDA* (US$m)

($29.6m) (2018: $14.7m)

Net Debt* (US$m)

$68.6m (2018: $98.1m)

Gross profit (US$m)

$1.2m (2018: $38.3m)

Net (Loss)/Profit (US$m)

($79.7m) (2018: ($1.7m))

Gross margin (%)

1% (2018: 30%)

Operating cash flow before working capital changes (US$m)

$7.6m (2018: $13.5m)

Please note the following comparative FY2018 figures in the chart above have been restated – sales; gross profit; gross margin; adjusted EBITDA; net profit/loss; and operating cash flow before working capital changes.

* Adjusted EBITDA and net debt are alternative performance measures which the Directors believe are helpful in understanding the performance of the business. Refer to Note 30 – Segmental Reporting (pages 129 and 130) for definitions of non-GAAP measures.

Key Performance Indicators

16


STRATEGIC REPORT

NON-FINANCIAL KEY PERFORMANCE INDICATORS

Cumulative global population with access to stevia (billion)

>5.0bn

Products in market (number of products)

27

Cumulative new launches with stevia Mintel data (number of launches)

>21,000

Global stevia leaf harvest (estimated metric tonnes)

>60,000

Health & Safety Lost Time Injury Incidence Rate (LTIIR)

3.5bn

17>6,900

$250–$300m

>58,000

>4.0bn

20>9,700

$400–$500m

>60,000

$250–$300m

>24,000

2019

2019 2019

2019 2019

2019

2018

2018 2018

2018 2018

2018

2016

2016 2016

2016

2016

2017

2017 2017

2017

2017

2015

2015 2015

2015

2015

>5.0bn

25>13,000

$400–$500m

>60,000 0.64

>5.0bn

25>17,000

>5.0bn

27>21,000 $400–$500m

>60,000 0.66

Production capacity in revenue equivalent (US$m)

$400–$500m

FY193: US, Canada, Mexico, Malaysia, Singapore FY182: Codex adoption of all steviol Glycosides from leaf FY171: US, EU, Australia, New Zealand, Canada FY16: India, Brazil FY15: Gulf Cooperation Council (GCC), Pakistan, Bangladesh

1 Sugar like tasting stevia molecules (e.g. Reb M, Reb D and others)

2 The Codex Alimentarius Commission is part of the FAO / WHO that develops international food standards. Adoption of steviol glycosides by Codex will facilitate the approval of better tasting stevia world wide

3 Sugar-like tasting stevia molecules by bioconversion of stevia leaf extract

Number of injuries that resulted in lost-work days per 200,000 hours

17


1 Non-GMO Project verified is North America’s most trusted seal for GMO avoidance. Source https://www.nongmoproject.org

FROM LEAF TO PRODUCTIndustry-defining innovation starts from the ground up – with the cultivation of the stevia plant. In this, no other Company has invested more. Our PureCircle SteviaTM Agronomy Programme and resultant proprietary stevia leaf varieties are the source of our many taste breakthroughs.

PureCircle is able to naturally crossbreed stevia plant varieties which satisfy a range of needs and outcomes. Whether to produce more of the most sugar-like steviol glycosides such as Reb M and D, or other stevia leaf ingredients, PureCircle’s proprietary stevia leaf varieties are able to provide a sustainable scale of stevia ingredients suitable for food and beverage companies.

We have been able to maximise the potential of this amazing little leaf by perfecting natural, cross-pollination methods, and scaling responsibly to meet the food and beverage industry’s demand for consistently high-quality stevia ingredients.

In addition to traditional stevia leaf extraction methods, PureCircle has developed a production process to extract Reb M and other ingredients from other stevia sweeteners in the plant. This process starts with purified stevia leaf extract, and by adding an enzyme, the maturation to Reb M or other ingredients is completed, just as the leaf does naturally. Enzymes play a similar role in various products including baby food, cheese, other dairy products and chocolate.

The stevia leaf ingredients produced from all of PureCircle’s processes are both from the stevia leaf, identical in great taste and are Non-GMO Project Verified1.

PURECIRCLE’S PROPRIETARY STEVIA LEAF VARIETIES ARE ABLE TO PROVIDE A SUSTAINABLE SCALE OF STEVIA INGREDIENTS SUITABLE FOR FOOD AND BEVERAGE COMPANIES

18


Chief Executive Officer’s Review

REBUILDING FINANCIAL HEALTH AND GOVERNANCEAt 30 June 2019, the Group’s gross cash position was $25.7m. This cash position benefited from working capital movements, particularly extended supplier payments, which may not be sustainable in the long-term. However, the Group has not been able to access the revolving credit facility and had incurred unexpected costs related to the investigations described above. In view of the tight liquidity situation, much of management’s time and effort has gone into exploring alternative debt and equity financing options to refinance its senior debt facility well before then.

Over the past few months, it has been the management team’s top priority to rebuild the confidence that all our stakeholders once had in the Company by improving its financial health and governance processes. The most urgent of these priorities is to deleverage the balance sheet of the Group to a more sustainable level. My CFO and I are undertaking initiatives to source both equity and debt to refinance the syndicated facility that is maturing in November 2020. At the same time, we will be actively managing the cashflow of the Group to ensure that it maintains a healthy balance between receivables and payables while unlocking cash for growing the business by reducing the high level of inventories.

The internal control failures that we have had in the recent years must not be repeated. As the CEO and a member of the Board, I will take an active role in working with the Audit Committee to strengthen financial oversight and setting policies and procedures in the Group to ensure no reoccurrence of previous accounting and governance issues. Management will continue to implement and enhance the Group’s policies and standard operating procedures relating to critical financial functions such as consolidation, inventory management and sales recognition policy etc.

MARKET OPPORTUNITIES The global stevia market continues to grow. PureCircle is positioning itself to deliver the best-tasting, zero-calorie, natural sweeteners to food and beverage companies, to meet consumers’ demands.

In 2019, PureCircle expanded and strengthened our Commercial team. Under the leadership of Stephane Ducroux, now our Deputy CEO, we enhanced our ability to fully capture our market opportunity. Stephane has focused on setting and implementing a set of key strategies aimed at delivering the next chapter of growth for PureCircle.

These new strategies involve transforming the business to scale, produce and sell breakthrough superior-tasting, natural stevia ingredients and commercialise new technologies. Our commitment to next generation ingredients and improving taste and consumer experience has, as expected, led to slower immediate short-term sales growth. Our focus is on product development, which has a long sell cycle, and we believe this is an important long-term investment, both in consumers’ adoption of stevia and longer-term sales. Customers are now switching and reformulating to next generation stevia leaf ingredients due to the superior taste profile, improved sweetness quality and enhanced mouthfeel experience.

The reformulations using our new generations of stevia ingredients have led to some cannibalisation of our base business and the results should be read in this context. We are pleased with the early wins and positive feedback we are getting about the great taste profile of our next generation stevia leaf sweeteners and flavours.

Market conditions continue to be favourable for stevia use to expand. PureCircle will continue to capitalise on that. Regulatory approvals in the Philippines for both versions of our Reb M stevia leaf sweetener in September 2019 were followed by approvals in Australia, New Zealand, Indonesia, Thailand, Vietnam and Taiwan.

“ IT IS AN HONOUR TO BE HANDED THE HELM OF THIS INNOVATIVE AND ENERGETIC ENTERPRISE.”

I joined the Board as the Group CEO and Executive Director on 10 February, 2020. It is an honour to be handed the helm of this innovative and energetic enterprise, with its clear mission of providing a portfolio of healthy, stevia-based natural sweeteners and flavours to its customers and their consumers.

As the Chairman noted in his report, this has been a time of great change and challenge at PureCircle. Today our board is made up of seven new Directors including a new Chairman, a new CEO and a new CFO. Despite being new to this role I have a long association with PureCircle having been involved with the Company since 2008.

PureCircle’s financial performance for 2019 is overshadowed by the failures in our governance and controls which has led to an impairment and additional costs for 2019 and a restatement of prior year’s financial statements.

Revenues were broadly flat between 2018 and 2019 as the innovation in our product and change in the product mix led to a reduction in volume of some older product lines. In addition, price pressure in these basic ingredients also posed challenges in defending our market shares in these increasingly commoditised products.

It was identified that the Group’s costing methodology was not appropriately allocating the full cost of inventory sold to comprehensive income, but instead, certain costs remained capitalised in inventory in 2018 and 2019 respectively. Accordingly, historical inventory was overstated and historical cost of sales was understated. For FY2019, the Group performed a comprehensive review and assessment of its NRV and provision of slow-moving inventory procedures to ensure its existing inventories were valued appropriately.

19


Due to our ongoing investment in R&D, our expertise extends to all aspects of stevia. That is why our corporate tagline is “everything stevia.” Everything we do is about helping our customers achieve their goals of reducing sugar, calories and the cost of ingredients without compromising on taste.

With this in mind, PureCircle has helped launch an international cola brand featuring next generation stevia leaf sweeteners. According to Innova Market Insights’ new product database, over 35 new products have launched with Reb M labelled on the product ingredient line since 2018. An exciting development for the Group was the launch in the summer of 2019 of zero-sugar-added stevia-sweetened ice-cream, which received overwhelmingly positive feedback.

In addition to sweeteners and flavours, we provide our customers with tailored and category specific blends of our robust portfolio of stevia leaf ingredients. Our industry-leading formulation expertise allows us to maximise taste with the most cost-efficient use of stevia ingredients. With our next generation stevia solutions, we work in partnership with our customers to achieve the taste profile they require for their products in different markets around the globe.

POWERFUL MARKET TRENDSRegulatory action, consumer demand and environmental considerations are all driving a growth in demand for stevia products.

Consumers, health experts and governments have become increasingly concerned about obesity and diabetes, and consumers are now more health and wellness conscious than ever before. More than 600 million people are now estimated to be obese, and 415 million are estimated to have diabetes. This number is expected to more than double by 20401.

Regulatory actions to address these public health issues are accelerating. Governments have continued to implement taxation on sugary drinks as part of a major action for comprehensive Programmes aimed at reducing consumption of sugars. Several additional major markets are debating a sugar tax law or using key nutritional labelling as ways to encourage lower sugar products on to the market.

Further, consumers are increasingly seeking products made with natural, sustainable ingredients. Driven by consumer demand, as well as government involvement and levies on sugar, many global food and beverage companies have committed to reduce sugar quantities in their products.

It is also important to note, the increased use of stevia sweeteners helps our customers reduce their carbon-, land-, and water footprint as they reduce the amount of sugar in their products.

Therefore, we anticipate food and beverage companies will continue to increase their use of stevia as their go-to, non-GMO, sweetening solution, as well as using stevia as a functional ingredient.

STRATEGY EVOLUTION AS A RESULT OF INNOVATIONThe story of stevia has changed significantly in the past few years. Not long ago, stevia was viewed as a plant-based, zero-calorie, single-ingredient sweetener which worked well in some beverage and food applications. Today, having developed a range of new generation stevia leaf ingredients, including Reb M, with sugar-like taste and zero calories, PureCircle has the industry’s most complete portfolio of stevia leaf ingredients, which are all from the stevia plant and non-GMO.

There are no taste trade-offs or compromises and our products taste as good as their full sugar counterparts. Therefore, our next generation stevia sweeteners continue to generate excitement among food and beverage companies.

Recent PureCircle advances have enabled us to significantly boost production of these high-grade stevia sweeteners (e.g. Reb M and Reb D) and flavours, which have the most sugar-like taste and are highly sought after by customers. This means we can supply the volume of stevia sweeteners food and beverage companies need as they expand use of stevia ingredients – and we can do it cost effectively for them.

We are also planning to expand our offerings of stevia leaf ingredients to include, not just sweeteners and flavours, but also protein, fibre and antioxidant ingredients – all from the stevia plant.

This will enable PureCircle to utilise much more of each stevia leaf. As such, the Company will be able to make each leaf “work harder”.

Our stevia ingredient blends are enabling superior taste performance, mouth feel and sweetness quality in an increasing number of food and beverage categories. Our proprietary stevia blends facilitate our customers’ use of stevia leaf sweeteners and allow for quicker product development and speed to market.

The technologies to produce the products PureCircle sells are covered by patents, applied for patents and other intellectual property rights. PureCircle’s broad and strong global array of patents are the result of its advanced innovation, research and development work with stevia and its investment therein. To-date, PureCircle has been granted more than 200 stevia-related patents, with more than 300 patents pending covering a wide range of stevia related products and processes.

PureCircle’s patent coverage and other intellectual property reflect its expertise and innovation with stevia. That expertise and innovation enables PureCircle to provide unparalleled support to its customers as they develop zero- and low-calorie food and beverage products and other products using stevia.

We are exploring new areas including using our stevia flavours for sodium reduction and masking undesirable flavour characteristics of other ingredients in various food and beverage categories. This will provide consumers a great-tasting, plant-based ingredient.

OPPORTUNITIESAccording to Innova Market Insights 2020 data, in 2019 there were well over 6,000 launches of food and beverage products containing stevia sweeteners, up +10% versus prior year. There have been over 35,000 products launched globally containing stevia since 2008. Over the last five years, stevia has had a compound annual growth rate (CAGR) of 12%. While beverages continue to be a key area of focus, other categories in food, such as dairy, from yoghurts to ice cream, and biscuits/cookies, are gaining strong momentum across all markets. These launches included well-known global and regional brands.

All these elements open up market potential for PureCircle’s innovation pipeline. Enabling food and beverage companies to partner with PureCircle to help them achieve uncompromising taste profiles tailored to their individual products and markets.

SUSTAINABILITY: FARMERS, COMMUNITIES & PLANETStevia is a force for good in the world. Our involvement throughout the supply chain enables us to be a key leader in corporate social responsibility.

The leaf is 250-400 times sweeter, depending on application, than sugar. As a result one fifth of the land provides the same amount of sweetness achieved from other sweeteners made from sugar cane or corn.

1 Data from https://www.diabetesatlas.org/en/sections/worldwide-toll-of-diabetes.html and https://www.who.int/news-room/fact-sheets/detail/obesity-and-overweight20


STRATEGIC REPORT

Chief Executive Officer’s Review continued

Less land means less water and less energy. This major impact is not just on the land but also the communities and co-operatives we work with. PureCircle continues to partner with our customers to reduce the impact the food and beverage industry has on the environment and global caloric intake. Since 2011, we have provided the equivalent amount of stevia to eliminate seven trillion calories from global diets.

Our commitment to corporate social responsibility is embedded in our corporate practices.

MANAGEMENTIn the last two years, PureCircle has significantly strengthened its commercial team and capabilities and it is now stronger than it has ever been. This has enabled us to maintain close working relationships with our valued customer base in the face of the departure of the CEO and CFO, which has been described in the Chairman’s Report. Together with some additional departures we experienced during the reporting period from various roles within our production, finance, supply chain and commercial teams, due to a strengthening of the job market, particularly in the US, this created an undeniably challenging environment.

I would like to extend my thanks to the remaining management team and their team members, who demonstrated true resilience by stepping up and taking more responsibilities and I am proud to say that they maintained as much focus as possible on the tasks at hand despite the pressures on our business.

In tandem with maintaining the high level of service that our customers have become accustomed to, the commercial team is also undertaking initiatives to diversify its customer base, bringing regional food and beverage companies into commercial partnerships with PureCircle.

Stephane, Deputy CEO, has over 20 years of global specialty ingredient experience and has transformed and grown companies from their early stages to international institutions. He is a customer-centric executive with a strong background in selling natural specialty ingredients to food and beverage companies. Since he joined the Company, he has overseen the expansion and strengthening of PureCircle’s global sales force. He was appointed Deputy CEO in February 2020.

In mid-2019, the Company hired a Vice President of Global Marketing, Alina Slotnik. Working with Stephane, Alina brings over 15 years of experience in delivering growth for B2B ingredient companies. She specialises in digital and analytical strategies to drive business and sales enablement and focuses on customer engagement and acts as a peer resource to our customers’ marketing departments. Her previous experience in B2B health product development and fast growing CPG brands will help accelerate the success of our customers’ use of stevia.

Despite the void in leadership for a few months of the reporting period, I believe that with these important and exciting changes to our Commercial team, we are well positioned to capitalise both on our own innovation and on global trends and to launch PureCircle on a new growth trajectory.

OUTLOOKPureCircle has a market leading range of products and continues to innovate, working closely with our customers. The market for our products which provides great tasting food without the calorific value of sugar is growing as a result of consumer choice and government action to reduce obesity.

With stevia regulatory clearances achieved in all major markets across the globe, the adoption and application of stevia as an ingredient continues to accelerate, providing PureCircle with a platform for strong medium-term growth.

The Group is mindful of the volatile outlook and economic uncertainties arising from the COVID-19 pandemic and has been monitoring the situation closely. Therefore, the Group will endeavour to conserve its cash flow by pro-actively managing its capital expenditure and working capital as well as identifying opportunities for cost savings that will not impact the long-term viability of the Group.

The Group has also considered the impact of COVID-19 on customers, suppliers and staff. The Group is cautiously optimistic that customers will continue to place sales orders but it is difficult to estimate the impact of COVID-19 on future sales orders and there may be a reduction compared to prior years should customers reduce orders or delay product launches.

The Group has not noted any terminations of supplier relationships over the past three months as we have a long-standing good relationships with our suppliers. We are monitoring closely the relationships in the coming months to ensure smooth production when we restart the manufacturing operation and work towards improving the difficult situation.

Over the past number of weeks, we have been working with our teams in production facilities in China and Malaysia to manage the ongoing developments relating to COVID-19. Our first priority remains the safety of our people and their families. Our teams in China and Malaysia are taking all appropriate protective measures in our facilities and we are working with authorities, our customers and other stakeholders to manage through the situation. Operations at our refinery plant in Malaysia has been suspended since 18 March 2020, to adhere to the government’s movement control order. However, we expect to resume operations immediately, following approval by the authorities of our application to reopen and restart production. The Group continues to have sufficient inventories at hand that should mitigate any further disruptions. Production at our extraction plant in China is running as usual.

Whilst our supply chain remains robust, we are taking steps to mitigate our risks. We are actively monitoring and managing our inventory level and liquidity positions in this unprecedented uncertain period.

Therefore, the outlook for the full year is now more cautious.

Peter LaiChief Executive Officer 31 March 2020

21


$20.4m net cash from operations

STRATEGIC REPORT

$312m(2018: $373m)

Total assets

$20.4m(2018: $15.9m)

Net cash from operations

$25m(2018: $24m) Cash and cash equivalents

(45.32)cents per share (2018: net loss 0.95 cents) Diluted net loss per share

$153m(2018: $163m) Total liabilities

($29.6m)(2018: Positive $14.7m) Adjusted EBITDA

22


Financial Review

During the preparation of these results the Group’s auditors made the Board aware that they were unable to reconcile the value of the Group’s inventory between two internal systems which were used to account for and manage inventory cost allocation. The auditors also identified a number of non-commercial transactions, and certain sales that appeared not to have been recorded in the appropriate accounting period.

Publication of the FY19 results was delayed while the Board and its advisers investigated how these matters arose and fully understood the financial implications. As a result of these investigations the Company has restated its results for FY18 and opening retained earnings.

The Group’s revenue for FY18 was restated as a result of the investigation. The Group also reviewed its revenue cut-off procedures which also resulted the adjustment in opening retained earnings as at 1 July 2018.

The Group’s gross profit has been further impacted by charges of $19.7m to write inventory down to its net realisable value and a further $14.8m to provide for slow-moving inventory, impairment on intangible assets of leaf & product developments of $15.7 million and a further $6.8m one-off cost has been incurred in professional fees during the investigation.

In addition, there are incremental professional costs of $6.8m (2018: NIL) in relation to the provision of audit, legal and advisory services from professionals arising from the review of the Group’s inventory cost allocation methodology and revenue investigation.

The Group secured an approval from its lenders for Waivers and Amendments to its Senior Facility Agreement (“Waivers and Amendments”). This fully waives all previous defaults, in addition to securing $8.6 million of additional liquidity into the business by way of an unsecured subordinated loan from certain substantial shareholders.

The Waivers and Amendments contains certain conditions and covenants that the Group may not be able to meet, and there is also the risk, in particular in relation to COVID-19 pandemic, that the Group may not have sufficient liquidity up until the facility is required to be repaid in November 2020. However, the Directors are exploring alternative financing options including securing a definitive new equity infusion, full debt refinancing or sale and leaseback of the refinery plant facilities as alternatives to raise cash to fund the business and operations before the facility needs to be repaid.

This is an important step in ensuring the Company remains viable and has the liquidity it needs to deliver on its strategy for the foreseeable future. Nonetheless, these matters indicate the existence of a material uncertainty that casts doubt on the Group’s going concern assumptions. Our auditors have drawn attention to the material uncertainty with respect to going concern in an emphasis of matter in their audit opinion.

SUMMARY FOR THE YEAR ENDED 30 JUNE 2019• Our 2018 results have been restated based

upon prior period adjustments identified during the current year. It was identified that the Group’s costing methodology was not appropriately allocating the full cost of inventory sold to comprehensive income, but instead, certain costs remained capitalised in inventory in 2017, 2018 and 2019 respectively. Accordingly, historical inventory was overstated and historical cost of sales was understated.

• The Group’s revenue was overstated due to non-commercial transactions and further, revenue was not recorded in the appropriate period, which has resulted in a restatement of FY17 and FY18 revenue. Given the impact to prior years, the Company further adjusted opening retained earnings as at 1 July 2018.

OPERATING RESULTS FOR THE YEAR ENDED 30 JUNE 2019• Revenue broadly flat at $124.0 million

(2018: $126.6m).

• Revenues were broadly flat between 2018 and 2019 as the innovation in our product and change in the product mix led to a reduction in volume of some older product lines. In addition, price pressure in these basic ingredients also posed challenges in defending our market shares in these increasingly commoditised products.

• Inventory write down to its net realisable value of $19.7 million due to South American leaf $5.3 million, by-products $11.0 million and finished goods of $3.4 million. In addition, provision of $14.8 million for slow-moving inventory has been provided for.

• Gross margin of 1.0% (2018: 30.2%) as a result of inventory being written down to its net realisable value (NRV) and provision of slow-moving inventory. The gross margin excluding NRV and provision for slow-moving inventory is 28.8% compared to 30.2% in 2018. Going forward, our inventory costing methodology will continue to allocate costs to by-products in the normal course of business. To the extent we are unable to immediately utilise the by-products, we will assess and provide for the slow-moving inventory. In 2019 we continue to experience price pressure in basic ingredients that posed challenges for the Company to defend its market share in these increasingly commoditised products. Hence, we faced downward pressure on maintaining gross margins during the year.

• Net loss $79.7 million (2018: net loss $1.7m), mainly impacted by:

• inventory net realisable value of $19.7 million, provision of slow-moving inventory of $14.8 million;

• impairment on intangible assets of leaf & product developments of $15.7million;

• deferred tax expense of $7.0 million;

• specific provisions on receivables of $1.8 million;

• expected credit loss on trade receivables and other receivables of $4.7 million and

• other expenses of $11.7 million comprised of $6.8m one-off professional costs incurred, specific and general provisions on receivables as well as intangible assets written-off of $2.5m. More information on the above can be found in Note 12 Inventories and Note 27 Other Income and Other Expenses respectively, of the Notes to the Consolidated Financial Statements.

• Continued innovation to create new proprietary stevia product – Sigma Syrup – which provides superior taste and overcomes solubility challenges encountered when using other stevia sweeteners.

• Developed PCS-3028, a new proprietary stevia leaf sweetener which increases stevia solubility by 10x.

• Field tested new and improved stevia leaf variants StarleafTM which contains more steviol glycosides.

23


The Group’s FY19 financial year covers the year from 1 July 2018 to 30 June 2019. FY18 comparatives are for the year from 1 July 2017 to 30 June 2018 and have been restated.

Set out below is an extract of Segmental Reporting (Note 30) from the audited FY19 financial statements. The complete financial statements and its accompanying notes are on pages 81 to 151.

FY19 USD’000

FY18 USD’000

(Restated1)

Revenue 124,003 126,601

Cost of sales (122,758) (88,320)

Gross profit 1,245 38,281

Gross margin % 1.0% 30.2%

Other income 5,875 1,138

Administrative expenses (34,477) (34,813)

Operating (loss) /profit (27,357) 4,606

Other expenses (33,955) (2,046)

Foreign exchange gain 4 1,363

Finance costs (11,015) (7,355)

Share of profit/(loss) of joint venture 80 (14)

Taxation (7,430) 1,784

(Loss) for the financial year (79,673) (1,662)

(Loss)/Earnings Per Share (US$ cents per share) (45.32) (0.95)

Fully diluted (Loss)/Earnings Per Share (US$ cents per share) (45.32) (0.95)

Operating cash flow before working capital changes 7,635 13,465

Working capital changes 12,777 2,461

Operating cash flow after working capital changes 20,412 15,926

Net debt

Gross debt 94,271 122,092

Gross cash (25,675) (23,987)

Net debt 68,596 98,105

Adjusted EBITDA2 (29,603) 14,724

1 Refer to Note 34 – Prior year adjustments on pages 133 to 135.

2 Gross margin, operating profit and Adjusted EBITDA are alternative performance measures which the Directors believe are helpful in understanding the performance of the business. Refer to Note 30 – Segmental reporting on pages 129 and 130 for definitions of non-GAAP measures.

24


STRATEGIC REPORT

Financial Review continued

SEGMENTAL REPORTING* COMMENTARYREVENUEFY19 revenue was $124.0m (2018 restated: $126.6m). The decrease arises from decline in sales from flavours products with a shift to breakthrough products.

Revenues have been driven by Asia Pacific and North America regions mainly due to improved distribution and a change in the product mix. Partnering with our customers and supported by our continuous innovation, are key enablers to customers’ adoption of stevia into their products as shown by increased new product launches. The decline in volume was mainly driven by certain base products being replaced with new and better tasting breakthrough products.

GROSS MARGIN AND GROSS PROFITGross profit decreased by $37.0m mainly due to inventory written down to its net realisable value and provision of slow-moving inventory amounting to $19.7m and $14.8m respectively (leaf, work-in-progress and finished goods).

During the year, it was identified that the Group’s costing methodology was not appropriately allocating the full cost of inventory sold to comprehensive income, but instead those costs remained capitalised in inventory. As such, historical inventory was overstated and historical cost of sales was understated. The amounts above have been restated to properly reflect inventory on hand at 30 June 2019 and 2018 respectively.

OPERATING PROFITOperating loss was $27.4m (FY18: Operating profit $4.6m) primarily due to inventory net realisable value write down of $19.7m and provision of slow-moving inventory of $14.8m, offsetting against other income of $5.5m received from a R&D supplier on termination of R&D agreement.

During the year, Management has impaired the leaf development in Latin America and America programmes by $13.9m. In addition, there are incremental professional costs of $6.8m (2018: NIL) in relation to the provision of audit, legal and advisory services from professionals arising from the review of the Group’s inventory cost allocation methodology and revenue investigation.

OTHER EXPENSESOther expenses increased by $31.9m mainly due to impairment of leaf development by $13.9m, $2.5m write-off of product development cost, impairment of intangible assets of $1.7m, bad debts provision of $1.8m, expected credit loss on trade receivables of $0.9m, provision for doubtful debts on other receivables of $3.8m and additional professional fees of $6.8m.

The impairment of leaf development costs is caused by the inability to obtain the necessary license to export stevia leaf from Paraguay to China where our extraction facility is located. This also led to a provision of $5.3m against leaf already purchased and awaiting export in South America.

Another termination of a product development agreement has led to a write-off of the product development cost of $2.5m.

Impairment of intangible assets relates to patents and development cost of certain products which is no longer profitable. Additional professional fees are incurred in relation to statutory audit overrun, forensic audit, debt advisory and compliance audit.

FINANCE COSTSIn FY19, finance costs were $11.0m (FY18:$7.4m). The higher finance cost was driven by amortisation of arrangement fees and higher interest rates.

NET LOSS AFTER TAXThe Group recorded a $79.7m net loss in FY19 (FY18: net loss $1.7m).

NET DEBTThe Group ended FY19 with net debt of US$68.6m (FY18:US$98.1m). Since year end, net debt decreased mainly due to a fund raising of $35m from share placement exercise and $20m was utilised to pay down the term loan.

LOSS PER SHAREOn a fully diluted basis, the loss per share was 45.32 cents as a result of the write down of inventories and impairment of intangible assets. Excluding the exceptional items, diluted loss per share was 33.55 cents.

OPERATING CASH FLOW BEFORE WORKING CAPITAL CHANGESThe Group generated $7.6m of operating cash flow before working capital changes in 2019, $5.8m lower than 2018.

ADJUSTED EBITDAFY19 Adjusted EBITDA loss of $29.6m (EBITDA profit in FY18: $14.7m). A combination of higher other expenses with inventory written down to its net realisable value contributed to lower earnings and hence lower Adjusted EBITDA.

TAXATIONThe tax expense of $7.4m was mainly attributable to the reversal of deferred tax assets in our US operation where there is no longer sufficient evidence these will be recovered through future taxable profits.

FINANCING, LIQUIDITY AND BANK COVENANTSAt 30 June 2019, the Group’s gross cash position was $25.7m. This cash position benefited from working capital movements, particularly extended supplier payments, which may not be sustainable in the long-term. However, the Group has not been able to access the Revolving Credit Facility (RCF) and had incurred unexpected costs related to the investigations described in the Chairman’s Report.

Under the terms of the Waivers and Amendments, the Group will be able to have access to the RCF following the receipt of the audited Financial Statements. The Group did not satisfy all of the conditions of the agreement but this was subsequently waived on 27 March 2020. The facility also contains certain other conditions.

In view of the tight liquidity situation and the upcoming RCF that falls due on 30 November 2020, much of management’s time and effort has gone into exploring alternative debt and equity financing options to refinance the Group’s RCF outstanding amount and senior debt facility well before then.

The Group is mindful of the volatile outlook and economic uncertainties arising from COVID-19 pandemic and has been monitoring the situation closely. Therefore, the Group will endeavour to conserve its cash flow by proactively managing its capital expenditure and working capital as well as identifying opportunities for cost savings that will not impact the long-term viability of the Group.

*Note 30 – Segmental reporting (pages 129 and 130)

25


Principal Risks and Uncertainties

As with any business, we face risks and uncertainties. Operating in a growing industry that PureCircle has pioneered, it is critical that the Group identifies, assesses and prioritises its risks. This, along with the development of appropriate mitigating actions, enables the Group to achieve its strategic objectives and protect its reputation.

During the year, the Company’s risk environment was challenged with the identification of errors in the classification and valuation of inventory, cost allocation in cost of sales and revenue recognition practices. These issues are mentioned in the Chairman’s Report, with their financial implications explained in the Financial Review.

In view of the scale and magnitude of impact from the above issues, the Board has acknowledged the urgent need for a robust review and revamp of people, culture, systems and processes in order to reduce and manage risks to an acceptable level. These measures, alongside with other initiatives identified throughout the Annual Report, are further defined in the Governance Report and the Audit Committee Report.

RISK MANAGEMENT FRAMEWORKThe Board is ultimately responsible for the oversight of risk and for maintaining a robust risk management and internal control system and has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Board recognises the importance of identifying and actively monitoring risks and challenges facing the business. The Audit Committee supports the Board in the management of risks and is responsible for reviewing the effectiveness of risk management and internal control processes. The Internal Audit function provides independent assurance to management and the Audit Committee in evaluating the design and operating effectiveness of the risk management programme and internal control processes to mitigate risks.

Whilst the risk management process is objective and is designed to provide reasonable assurance, it should not be construed as the absolute indicator that all

risks can be identified and managed to an acceptable level. Some risks will remain beyond the direct control of management.

IDENTIFICATION OF RISKSIdentifying and monitoring risk is a continual process. The Group has established a network of risk owners and sponsors across the organisation and we utilise this network to identify risks faced by our business. In addition, based on our Risk Management Framework, our Risk Committee (comprising of our Chief Executive Officer, Deputy Chief Executive Officer cum Chief Commercial Officer and Chief Financial Officer) reviews risks, controls and mitigation strategies at least twice a year. This forms the basis for our Principal Risks and Uncertainties, which is challenged and validated by our Audit Committee, and thereafter our Board.

During the year, the level of risk arising from Long-Term Funding, Working Capital and Inventory Management increased significantly. The Board has also identified Culture and Internal Control Environment as new emerging risks.

Top down

Bottom up

Board of Directors• Sets the tone at the top and defines risk appetite

• Identifies principal risks and monitors emerging risks

• Overall responsibility for maintaining sound risk management and internal controls

Risk Committee• Identifies and assess principal risks

• Monitors risk and risk response plans against risk appetite and tolerance levels

• Provides direction on applying risk management framework

• Provides guidance and training

Audit Committee• Supports the Board in monitoring risk exposure

against risk appetite

• Sets the risk management framework

• Reviews effectiveness of our risk management framework and internal control systems

Internal Audit • Provides assurance on effectiveness of the risk programme

• Tests of key controls and co-ordinates risk management activities

• Provides expertise and support to business process owners

• Report and monitoring

Business process owners• Formalise policies and procedures

• Own and review operational risks

• Operate controls and implement mitigation actions

IDENTIFY RISKS

ASSESS RISKS AND INTERACTIONS

PRIORITISE RISKS

RESP

OND

AND

MITI

GATE

RIS

KS

MONI

TORIN

G AND

REPORTING

RISK MANAGEMENT

PROCESS

RISK MANAGEMENT FRAMEWORK

PURECIRCLE’S ENTERPRISE RISK MANAGEMENT PROGRAMME

26


STRATEGIC REPORT

At the time of writing, in view of the current COVID-19 outbreak and given the rapidly evolving nature of the pandemic, the Group has done a detailed assessment on the existing production plan and sales channel condition.

The Group has also considered the impact of COVID-19 on customers, suppliers and staff. The Group is cautiously optimistic that customers

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